Securities And Exchange Commission v. The Nutmeg Group, LLC et al
Filing
541
MEMORANDUM Opinion and Order. Signed by the Honorable Jeffrey T. Gilbert on 9/21/2012. (ep, )
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
UNITED STATES SECURITIES
AND EXCHANGE COMMISSION,
Plaintiff,
vs.
THE NUTMEG GROUP, LLC,
RANDALL GOULDING,
DAVID GOULDING,
Defendants,
DAVID GOULDING, INC.,
DAVID SAMUEL, LLC, FINANCIAL
ALCHEMY LLC, PHILLY FINANCIAL
LLC, SAM WAYNE, and ERIC
IRRGANG,
Relief Defendants.
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No. 09 C 1775
Jeffrey T. Gilbert
Magistrate Judge
MEMORANDUM OPINION AND ORDER
This matter is before the Court on defendant Randall Goulding’s Motion for Deemed
Admissions and for Other Relief [Dkt.#456] and his Second Motion for Deemed Admissions and
for Other Relief [Dkt.#466]. For the reasons set forth in this Memorandum Opinion and Order,
both motions are denied.
This is a civil enforcement action brought by the United States Securities and Exchange
Commission (“SEC”) against The Nutmeg Group, LLC (“Nutmeg”), an investment advisor,
Randall Goulding, who is Nutmeg’s owner and managing member, and David Goulding, who is
Randall Goulding’s son and Nutmeg’s former Chief Compliance Officer. The SEC alleges,
among other things, that Nutmeg and Randall Goulding violated the Investment Advisors Act of
1940, 15 U.S.C. §§ 80b et seq., by failing to maintain required books and records, commingling
client and fund assets, overstating the performance of Nutmeg’s investment funds, transferring
fund assets to the custody of entities and individuals controlled by Goulding, and
misappropriating fund assets. The Court directed Crowe Horwath, an accounting firm, to
provide an accounting of Nutmeg and its funds. [Dkt.#38]. The Court also appointed a Receiver
in this matter [Dkt.#63], and the Receiver thereafter directed Crowe Horwath’s work.
The SEC filed an Amended Complaint on June 14, 2011 and certain allegations in the
Amended Complaint were based on opinions set forth in Crowe Horwath’s November 16, 2010
report. [Dkt.#314], at ¶¶83-88. Specifically, the SEC alleged that “[a]ccording to Crowe
Horwath’s November 16th report, Nutmeg owes Fund investors at least $2,334,838.17 as a result
of overstatement of management and performance fees, improper distribution to investors,
improper[] allocation of investment costs, improper allocation of investment proceeds, improper
calculation of partnership profits, Randall Goulding’s use of investor funds for his own personal
investment and improper related party transactions.” Id. at ¶88.
Randall Goulding issued interrogatories on June 16, 2011, seeking specific information
from the SEC about the allegations in its Amended Complaint that referred to the Crowe
Horwath report as well other allegations in the SEC’s Amended Complaint. The SEC responded
to these interrogatories on September 16, 2011. The SEC objected to the interrogatories but,
subject to those objections, further explained that its proof on the misappropriation claims would
depend upon the testimony of Mari Reidy, the author of the November 16, 2010 Crowe Horwath
report. [Dkt.#508-2], Ex. B at 4. The SEC identified the portions of Crowe Horwath’s
November 16, 2010 report that corresponded to the allegations in the Amended Complaint and
stated “to the extent that any of the information requested in Interrogatory No.1 is not fully
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described in Crowe Horwath’s November 16, 2010 report, the Commission does not have
additional information to provide to the defendant at this time.” Id.
Randall Goulding was not satisfied with the SEC’s responses to his interrogatories, but
did not challenge the SEC’s objections. Nor did Goulding move to compel more detailed
answers. Instead, Goulding served the SEC with a set of Requests for Admission pursuant to
Federal Rule of Civil Procedure 36 containing, among other things, requests that the SEC admit
that it “did not know” anything about the various categories of misconduct alleged in the
Amended Complaint. [Dkt.#456-2], Ex.A. To the extent the SEC did not admit that it did not
know the information proffered in the Requests for Admission, Goulding also served an
accompanying interrogatory asking the SEC to “state in detail each and every basis for such
denial.” Id.
On December 7, 2011, the SEC served its responses, including its objections, to
Goulding’s Requests for Admission of Facts and Interrogatory. [Dkt.#508-1], Ex. A. The SEC
objected to the Requests for Admission as improper, compound, overbroad, argumentative, and
vague, among other objections. Notwithstanding its objections, however, the SEC answered
Request for Admission No. 1 by referencing its previous answer to Goulding’s Interrogatory No.
1 dated September 6, 2011, wholly objected to Request For Admission No. 2 without any further
response, and denied Requests for Admission Nos. 3 through 8. [Dkt.#508-1], Ex. A at 2-6.
Instead of filing a motion to challenge the SEC’s objections and answers, Goulding filed a
Motion for Deemed Admissions and for Other Relief [Dkt.#456], requesting that this Court
determine that the SEC has not acted in good faith, has not complied with its obligations
pursuant to either Rule 36 or Rule 37 of the Federal Rules of Civil Procedure and determine that
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the SEC is deemed to have admitted the November 4, 2011 Requests for Admission of Facts.
Goulding asks this Court to ignore the objections and answers put forth by the SEC, and instead
deem the requests admitted. The Court declines to do so.
Pursuant to Federal Rule 36(a)(6), a requesting party “may move to determine the
sufficiency of an answer or objection.” FED. R. CIV. P. 36(a)(6). With this motion, however,
Goulding skips that step and presumes that the SEC’s objections have been deemed insufficient
by the Court. That is not the case here. Federal Rule of Civil Procedure 36 is not a discovery
device, but rather creates a procedure for obtaining admissions for the record of facts already
known by the party propounding the request. See Stallings-Daniel v. Northern Trust Co., 2002
WL 424629, at *1-2 (N.D. Ill. 2002), citing 8A Charles Alan Wright, Arthur R. Miller &
Richard L. Marcus, Federal Practice and Procedure § 2253 (1994). “The purpose of Rule 36 is to
allow parties to narrow the issues to be resolved at trial by effectively identifying and
eliminating those matters on which the parties agree.” United States v. Kasuboski, 834 F.2d
1345, 1350 (7th Cir. 1987).
Requests to admit are proper when they are used to establish facts or the application of
law to facts but not to establish legal conclusions. See 7 James W. Moore, Moore’s Federal
Practice § 36.10[8] (3d ed. 2006); see, e.g., Enduracare Therapy Management, Inc. v.
Cornerstone Healthcare of Illinois, Inc., 2006 WL 1452824, at *4 (S.D. Ill. 2006), citing Golden
Valley Microwave Foods, Inc. v. Weaver Popcorn Co., 130 F.R.D. 92, 96 (N.D. Ind. 1990)
(request for admission that patent claim is valid improperly seeks legal conclusion). None of
Goulding’s requests are designed for this purpose. Instead, his requests ask the SEC to admit that
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it does not know certain information or that it lacks the ability to provide information not found
in the November 16, 2010 Crowe Horwath report.
The heart of the SEC’s objections to the Requests for Admission is that its current state
of knowledge is not admissible evidence and that Goulding should depose Mari Reidy if he
wants to discover additional information about the work and conclusions described in the
November 16, 2010 Crowe Horwath report.1 The Court agrees and finds nothing improper about
the SEC’s objections or responses that would warrant deeming the requests admitted at this time.
The SEC objected to Request for Admission No. 1 and, then subject to its objections, answered.
Similarly the SEC objected to Requests for Admission Nos. 3 through 8 and, then subject to
those objections, denied them. Goulding does not challenge those objections here.
As for the SEC’s response to Request for Admission No. 2, the SEC wholly objected to
the request as vague and argumentative. [Dkt.#508-1], Ex. A at 4. The Court agrees with the
SEC’s characterization of that request. At base, Goulding’s Request for Admission No. 2 asks
the SEC to admit his theory of the case. Again, that is not a proper subject for a request to admit.
Goulding’s Requests for Admission do not seek the admission of specific facts but instead
attempt to get the SEC to admit its own lack of knowledge of facts. That is not a proper subject
for a request to admit. Further, the SEC’s knowledge, or lack of knowledge, are not “facts, the
application of law to fact, or opinions about either,” or “the genuineness of any described
document” within the meaning of Federal Rule of Civil Procedure 36(a)(1).
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While this motion was pending, Goulding apparently did depose Mari Reidy.
[Dkt.#509], at 4. Presumably, at that deposition, Goulding asked Ms. Reidy the questions he
wanted to ask her about her report.
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Even if the Court were inclined to deem admitted that the SEC does not know a fact, that
would not be a “fact” admissible at trial. The asserted facts at the core of this case either are true
or not; the SEC’s current state of knowledge is not relevant to or probative of anything. To the
same effect is Goulding’s request that the SEC admit that it has “no basis to dispute” the facts
that Goulding asks the SEC to admit it does not know. Again, such an “admission” would not be
admissible at trial. Therefore, the Motion for Deemed Admissions and for Other Relief
[Dkt.#456] is denied with respect to all of Goulding’s Requests for Admission.
Goulding also filed a Second Motion for Deemed Admissions and for Other Relief
[Dkt.#466], seeking a determination that the SEC is deemed to have admitted an additional
Request for Admission that was served by Goulding on December 22, 2011. Again, to the extent
the SEC did not agree with the statements set forth in the December 22, 2011 Request for
Admission, Goulding also served an accompanying interrogatory seeking an explanation of the
SEC’s bases for its denial. The substance of the December 22, 2011 Request for Admission asks
the SEC to agree with Goulding’s view of the facts, i.e. that there was no misappropriation of
investor funds, which, of course, is a dispute at the heart of this case. If the SEC did not admit
the propounded facts, then Goulding requested that the SEC provide him with more detailed
information about the testimony of Mari Reidy in addition to what was set forth in her November
16, 2010 report.
Subject to its general objections and other specific objections, the SEC also objected to
Request for Admission No. 1 as argumentative, vague and ambiguous but, subject to all of its
objections, the SEC denied the request. The SEC also answered the interrogatory, subject to its
objections, explaining that “the Commission relies upon the testimony of a third-party witness,
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whom would be subject to cross examination, and who was recently deposed by Defendant
Randall Goulding as well as the reports prepared by Crowe Horwath.” [Dkt.#509-1], at 3- 4.
Pursuant to Federal Rule 36(a)(6), a requesting party “may move to determine the
sufficiency of an answer or objection.” FED. R. CIV. P. 36(a)(6). With the instant motion,
however, Goulding again attempts to skip that step and presumes that the SEC’s objections have
been deemed insufficient by the Court. That is not the case and, for the same reasons as
discussed above, the Court finds that Goulding’s Request for Admission is improper. Clearly, the
SEC and Goulding have different perspectives on the facts. If Goulding takes issue with the
Crowe Horwath report and the conclusions included therein, then Goulding can cross examine
Ms. Reidy at trial or submit evidence, including his own testimony, that he did not
misappropriate any investor funds. The December 22, 2011 Request for Admission does not seek
to establish a specific fact but instead asks the SEC to agree with Goulding’s version of the facts.
The SEC is not obligated to do that if it disputes those facts as it apparently does here.
If a party believes that a response for admission is incorrect or improper, and a Rule
36(a)(6) motion is denied or not available, then the appropriate remedy is to prove the disputed
matter at trial and seek an award of reasonable expenses. See Climco Colis Co. v. Siemens
Energy & Automation, Inc., 2006 WL 850969, at *1 (N.D.Ill. 2006). It is not surprising that the
SEC and Goulding fundamentally disagree on the facts. The SEC intends to try to prove the
misappropriation alleged in paragraphs 83 to 88 of its Amended Complaint through the
November 16, 2010 Crowe Horwath report and testimony of Mari Reidy. Goulding disputes that
he misappropriated any funds, and he intends to try to prove at trial that the conclusions set forth
in the Crowe Horwath report are not accurate. The Court is not prepared at this stage to deem
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one party’s or another’s version of the facts the “true” version using Federal Rule of Civil
Procedure 36 to leapfrog the adversary process. Therefore, the Second Motion for Deemed
Admissions and for Other Relief [Dkt.#466] also is denied.
It is so ordered.
___________________________________
Jeffrey T. Gilbert
United States Magistrate Judge
Dated: September 21, 2012
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